ESRI Analyzes Energy Tax Options

Ireland's carbon tax could result in increased revenue and lower CO2 emissions, but is also likely to have a negative effect on the macro economy.

The claim is made in a new publication from the Economic and Social Research Institute (ESRI), "Carbon Tax Scenarios and their Effects on the Irish Energy Sector." It estimates new energy demand equations for Ireland, and considers the impact of two different carbon tax scenarios on energy demand, CO2 emissions, and government revenue.

The first assumes that the price of carbon will follow the trajectory set by the European Union's (EU) Emissions Trading Scheme (ETS), rising from EUR21.5 per tonne in 2012 to EUR41 in 2025. The second is a "high tax" scenario, in which the carbon tax would gradually increase to CAD50 a tonne in 2025.

In the first instance, the ESRI believes that total emissions could be reduced by around 861,000 tonnes of CO2 by 2025, relative to a zero carbon tax scenario. The Government could expect to be receiving EUR1.1bn in revenue a year by 2025. Were the second scenario to materialize, there would be still greater reductions in CO2 emissions, and improved tax revenue.

However, the ESRI also found that a carbon tax of EUR41 per tonne would result in a 0.21 percent contraction in gross domestic product (GDP). If the proceeds were used to repay the country's deficit, employment levels could drop by 0.08 percent.

In the ETS scenario, by 2025 the balance of payments surplus (relative to gross national product) would be up by 0.93 on a no tax scenario. The high tax scenario would result in a surplus of 1.13 percent.

Overall, the ESRI considers that the negative impact of carbon taxes on the macro-economy is less than that of labor taxes. Indeed, were the Government to use the revenue generated by carbon to lower labor taxes, the net macroeconomic effect would be positive.

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